Coronavirus - Job Retention Scheme
- The scheme applies to employees who have been asked by their employer to stop working as a result of the impact of COVID-19, but who are being kept on the payroll until the longer-term impact on their role is known. It is to safeguard employees from being made redundant and these affected employees are known as ‘furloughed workers’.
- The scheme will cover the cost of wages (backdated to 1 March 2020) and run for 3 months, which will be extended if necessary. It is open to all UK employers that had created and started a PAYE payroll scheme on or before 28 February 2020, and have a UK bank account.
- Furloughed employees must have been on your PAYE payroll on 28 February 2020, and can be on any type of contract.
Employers will be able to use the portal to claim a grant for 80% of furloughed employees’ usual/regular monthly wage costs (fees, commission and bonuses should not be included) up to £2,500 a month, plus the associated Employer National Insurance contributions and minimum automatic enrolment employer pension contributions on that subsidised wage.
For full time and part time salaried employees:
The employee’s actual basic salary before tax, as of 28 February 2020 should be used to calculate the 80%.
For employees whose pay varies:
If the employee has been employed for a full twelve months prior to the claim, you can claim for the higher of either:
a. The same month’s earning from the previous year;
b. Average monthly earnings from the 2019-20 tax year.
If the employee has been employed for less than a year, you can claim for an average of their monthly earnings since they started work.
You should make your claim in accordance with actual payroll amounts at the point at which you run your payroll, or in advance of an imminent payroll.
- At a minimum, employers must pay their employee (through the normal payroll process) the lower of 80% of their regular wage or £2,500 per month. An employer can also choose to top up an employee’s salary beyond this, but is not obliged to under this scheme.
- The amount of grant that the employer receives for an employee’s gross pay must be paid to them as a minimum and no “fee” can be deducted by the employer from the wage/salary.
- Employer National Insurance Contributions and automatic enrolment contribution on any additional top-up salary will not be funded through this scheme. Nor will any voluntary automatic enrolment contributions above the minimum mandatory employer contribution of 3% of income above the lower limit of qualifying earnings (which is £512 per month until 5th April and will be £520 per month from 6th April 2020 onwards). Employers can use this scheme anytime during this period.
- Once you’ve worked out how much of an employee’s salary you can claim for, you must then work out the amount of Employer National Insurance Contributions and minimum automatic enrolment employer pension contributions you are entitled to claim.
- The government will issue more guidance on how employers should calculate their claims for Employer National Insurance Contributions and minimum automatic enrolment employer pension contributions, before the scheme goes live.
Whilst it is currently clear that only director’s salary, and not dividends, can potentially be subject to the grant claim, what tasks a director in an owner managed company can still do whilst being furloughed is not currently covered by a single “black and white” answer that fits all scenarios. Every case should be considered on its own merits, but subject to this and any further clear clarification from HMRC, we offer the following guidance and suggestions:
- A single director can potentially furlough themselves if he/she is unable to perform such tasks, as a result of COVID-19, which previously generated income for the business and that income stream has now totally stopped. If a single director previously generated all the company’s income (e.g. was hands-on selling goods through close interaction with customers) and this income fell to zero as a result of COVID-19, we suggest that this is a good starting basis for being furloughed. If all a director is able to do is effectively act as steward for the company, ensuring that the minimum statutory duties are adhered to, but the company is not able to actively trade to earn income in the furlough period (minimum 3 weeks), then there is likely to be a strong case for a claim. You would need to look at what other tasks the director is still doing and assess the case on its own merits.
- In a company with more than one director (for example where there might be a financial director, sales director and operational director), if COVID-19 meant that two out of the three directors were unable to undertake any of their normal day to day roles (e.g. sales and operations), possibly coupled with a drop in income for the company, at the very least we would suggest that it should be possible for these two directors to be furloughed and the grant claimed in respect of their salary. As for the remaining director, you would need to look at his/her day to day role and ongoing tasks beyond minimum statutory/fiduciary duties, to decide whether that person too could be furloughed. Much would depend here on the ability of the company to still generate some income in any given period.
Either of the above approaches could of course be challenged by HMRC and we would urge you to document your justification for individual directors being furloughed in each relevant period. An example of potentially good evidence to support a director being furloughed would be VAT returns filed for the furloughed period if they show no turnover at all.
If any further guidance or clarification comes to light, we will let you know.
Other Key Points
To be eligible for the subsidy, a furloughed employee cannot undertake work for on behalf of the organisation. This includes providing services or generating revenue. While on furlough, the employee’s wage will be subject to the usual income tax and other deductions.
- If an employee is working, but on reduced hours, or for reduced pay, they will not be eligible for this scheme.
- Employers should discuss with their staff and make any changes to the employment contract by agreement and to be eligible for the subsidy employers should write to their employee confirming that they have been furloughed and keep a record of this communication. We have sample wording, which we can send you for this.
- You do not need to place all your employees on furlough. However, those employees who you do place on furlough cannot undertake work for you.
- Employees on sick leave or self-isolating should get Statutory Sick Pay (or be paid in accordance with the employer’s occupational sick pay policy as applicable), but can be furloughed after this.
- If your employee has more than one employer, they can be furloughed for each job. Each job is separate, and the cap applies to each employer individually.
- If workers are required to, for example, complete online training courses whilst they are furloughed, then they must be paid at least the NLW/NMW for the time spent training, even if this is more than the 80% of their wage that will be subsidised.
Income tax and Employee National Insurance
- Wages of furloughed employees will be subject to Income Tax and National Insurance as usual. Employees will also pay automatic enrolment contributions on qualifying earnings, unless they have chosen to opt-out or to cease saving into a workplace pension scheme.
- Employers will be liable to pay Employer National Insurance contributions on wages paid, as well as automatic enrolment contributions on qualifying earnings, unless an employee has opted out or has ceased saving into a workplace pension scheme.
- Businesses can deduct employment costs as normal when calculating taxable profits for Income Tax and Corporation Tax purposes.
Please note that this is only a summary of the main issues and should not be construed as advice. Every effort has been made to ensure factual accuracy at the time of publication (6 April 2020), however, the government response to the Coronavirus situation is changing constantly, so it should not be relied upon completely.